Speculators A Convenient Whipping Boy For Political Acts That Drive Up Oil Prices

Energy Policy: A group of liberal senators once again want to pass a law that would force the Commodity Futures Trading Commission to clamp down on oil speculators. Their ignorance of how markets work is breathtaking.

These senators, led by Vermont socialist Bernie Sanders, claim speculative evildoers control 80% of the oil market, and are to blame for rising gas prices. When lawmakers blame speculators, you can be sure they're covering for their own ineptitude.

Basically, the senators say that since supply is rising, and demand is at its lowest since 1997, the price of oil should be falling — not rising. That means speculators must be stealing billions from consumers.

But this is false — and more than a little bit silly.

Recent price hikes have a geopolitical cause. A good chunk of Iran's hefty supply has been taken off the market, tightening a delicate supply-demand balance. Refiners worry about a wider conflagration in the Mideast.

It's their job to secure oil and "crack" it into usable products, such as gasoline, heating oil and jet fuel. If you were them, wouldn't you buy extra oil, just in case?

Well, that's speculation. And if the price of oil goes up today, and you rush to the gas station to beat the higher price tomorrow — guess what? You too are a speculator.

Today, the economy is improving, boosting fuel demand. But while oil supplies are ample in the U.S., the same isn't true in Europe and China. And the market for oil is a global market, not a local one.

For politicians, it's far easier to blame futures traders — speculators — than to admit their own failure.

Take Sen. Maria Cantwell, D-Wash., who on March 29 blamed speculators for pushing up the price of gas.

As we've written before, speculators do not control markets — a view bolstered by a report last September from the Institute of International Finance. Looking at numerous studies, the IIF found little evidence of a link between speculation and higher prices. Rather, the IIF found commodity prices are driven by market fundamentals — supply and demand.

As economist Robert Murphy of the Institute for Energy Research wrote: "Blaming speculators for rising oil prices is like blaming thermometers for a heat wave."

In recent years, rising demand from emerging markets like Brazil, India and China has boosted demand. World Bank data show the global economy grew more rapidly from 1999 to 2010 than it ever had in history.

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